This post first appeared on Minyanville.
It appears even the embattled homebuilding industry is getting rosy-eyed, finding enough "green shoots" of economic recovery to stick their shovels back into the ground.
In May, US builders broke ground on 17.2% more projects than in April, far exceeding analysts' expectations. Work on new apartment buildings leaped, while single-family starts continued what's now become a 3-month rally.
Although the aggregate figure is still well off last year's rate, economists are breathing a sigh of relief that the worst of the housing market swoon could be behind us. Skeptics, however, are quick to point out that any recovery could be muted, as high levels of inventory, a weak labor market, and mortgage rates that just won't seem to stay down, could forestall any recovery.
As Kenneth Simonson, chief economist for the Associated General Contractors of America, told the New York Times, "There's a real possibility [housing starts] will just stall at a low level. If the recent jump in interest rates is sustained, that could choke off buyer enthusiasm for new homes."
For nearly 4 years, the business of building and selling homes has been, in a word, lousy. As home prices tumbled, the likes of KB Home (KBH), Toll Brothers (TOL) and Lennar (LEN) slashed prices, offered generous incentives, and otherwise bent over backwards to unload inventory. Building all but stalled, jacking up unemployment -- particularly in exurbs and sprawling communities whose economies were largely based on the construction trade. An industry that grew fat during the boom was forced to slim down, lay off workers, and hibernate, while the market's violent correction ran its course.
And although a host of small builders have closed up shop, to date, no major US homebuilder has gone under. Consolidation, too, has been scant. The only merger of note was Pulte Home's (PHM) purchase of Centex (CTX), a marriage that, once consummated, will create the country's largest builder.
The outlook for those builders that remain -- builders that are bleeding cash while pleading with creditors to extend loan terms and waive busted covenants -- is bleak. Last week, the National Association of Homebuilders/Wells Fargo Builder Sentiment Survey ticked down after rising far more than expected the month before. Higher interest rates are mostly to blame, as the specter of bigger monthly payments is quelling optimism that the housing market is on the mend.
The reality -- an unfortunate one for builders and their employees -- is that for the foreseeable future, their services aren't needed in this country; we have too many homes as it is. Demand for new ones remains weak as communities just a decade old slip into disrepair, and shoddy craftsmanship and half-finished developments scare off prospective buyers.
Builders are also fouling up the nascent housing "recovery" by turning recently completed condominium units into rentals. Even as demand wanes thanks to job losses and tighter budgets, rental inventory is rising. Rents, as a result, are falling. This is great news for tenants, eager to jump on affordable apartments, but bad news for landlords and even homeowners.
One of the most popular arguments posited by housing-market-bottom callers is that in some of the hardest hit areas, prices have gotten so low that investors can scoop up cheap homes and rent them for an attractive return. What they neglect to mention, however, is that this sort of market-clearing activity also increases the supply of rental units, further pressuring home prices. Even in the worst, most washed-out areas, a bottom remains elusive.
Showing posts with label homebuilder. Show all posts
Showing posts with label homebuilder. Show all posts
Friday, June 19, 2009
Keepin' It Real Estate: Where Have All the Houses Gone?
This post first appeared on Minyanville and Cirios Real Estate.
Where have all the flowers gone, long time passing?
Where have all the flowers gone, long time ago?
When will they ever learn, when will they ever learn?
-Pete Seeger
There's an odd refrain cropping up in some of the nation's most troubled housing markets -- those where real estate professionals can't help but raise their pom-poms in unison and declare this "the best buying opportunity, maybe ever."
Here's how it goes: Where have all the houses gone?
For months, buyers have been told the time to buy is now, what with interest rates at all-time lows, prices down in some markets more than 50%, and generous tax credits for first-time home buyers. These factors -- along with aggressive advertising by the National Association of Realtors -- have driven up demand, even as prices have continued to fall. Supply, meanwhile, has been severely limited for the past 6 months by foreclosure moratoria that were enacted at the end of 2008.
And as tends to happen when demand outweighs supply, many homes have been selling above their list prices as multiple-offer scenarios led agents around the country to wax lyrical about the boom days of yesteryear.
This cursory analysis of the nation's housing market -- while sufficient for the financial punditry complex, which is eager to call a bottom (again), and certain real-estate agents looking to make a quick sale -- is woefully inadequate for any buyer interested in buying an actual home rather than a data point.
Take these 2 California markets for example -- a pair that couldn't be more different if one were located on the moon:
Bakersfield, a Central Valley farming and oil town best known for jockeying with Fresno for the right to be called "the armpit of California," was besieged by the housing-market crash early on.
Subprime lending flourished here during the boom, as home builders like Lennar (LEN), Centex (CTX), and DR Horton (DHI) showered once-quaint communities with sprawling suburban developments. The town made national press for one of the worst real estate markets in the country -- prices have fallen an astounding 48% since just last year.
Where have all the flowers gone, long time passing?
Where have all the flowers gone, long time ago?
When will they ever learn, when will they ever learn?
-Pete Seeger
There's an odd refrain cropping up in some of the nation's most troubled housing markets -- those where real estate professionals can't help but raise their pom-poms in unison and declare this "the best buying opportunity, maybe ever."
Here's how it goes: Where have all the houses gone?
For months, buyers have been told the time to buy is now, what with interest rates at all-time lows, prices down in some markets more than 50%, and generous tax credits for first-time home buyers. These factors -- along with aggressive advertising by the National Association of Realtors -- have driven up demand, even as prices have continued to fall. Supply, meanwhile, has been severely limited for the past 6 months by foreclosure moratoria that were enacted at the end of 2008.
And as tends to happen when demand outweighs supply, many homes have been selling above their list prices as multiple-offer scenarios led agents around the country to wax lyrical about the boom days of yesteryear.
This cursory analysis of the nation's housing market -- while sufficient for the financial punditry complex, which is eager to call a bottom (again), and certain real-estate agents looking to make a quick sale -- is woefully inadequate for any buyer interested in buying an actual home rather than a data point.
Take these 2 California markets for example -- a pair that couldn't be more different if one were located on the moon:
Bakersfield, a Central Valley farming and oil town best known for jockeying with Fresno for the right to be called "the armpit of California," was besieged by the housing-market crash early on.
Subprime lending flourished here during the boom, as home builders like Lennar (LEN), Centex (CTX), and DR Horton (DHI) showered once-quaint communities with sprawling suburban developments. The town made national press for one of the worst real estate markets in the country -- prices have fallen an astounding 48% since just last year.
Monday, May 11, 2009
Keepin' It Real Estate: Subprime Lending Is Back With a Vengeance
This post first appeared on Minyanville and Cirios Real Estate.
Just when you thought it was safe to go back in the water... Subprime lending has come roaring back.
But this time, reckless financial innovation isn’t being hatched on Wall Street. Instead, state governments are angling to “monetize” first-time homebuyer tax credits so borrowers can purchase homes with little or no money down.
If this sounds eerily similar to the type of lending practices that got us into this mess, well, it should.
The federal government, as part of the recently passed economic stimulus package, will refund first-time homebuyers up to $8,000 if they meet certain eligibility requirements. The program is frequently cited as one of the myriad reasons a bottom in the housing market is imminent.
Critics, however, argue that rebates don't end up in a buyer’s pockets until his or her 2009 tax returns are filed - even though rebates are credits, not just deductions.
Homebuilders like Pulte Home (PHM), Lennar (LEN) and KB Home (KBH), along with their lobbying arm, the National Association of Homebuilders, have thrown their full weight behind the rebate program, but say it still doesn't go far enough.
In an effort to boost home buying -- even for marginally qualified borrowers -- a number of states are finding creative ways to advance the tax credit to buyers on the day they get their new keys, rather than having to wait for next year's refund check. This allows buyers to pay for things like closing costs, mortgage points - or even the down payment.
States are employing schemes whereby they offer prospective buyers low or no-interest loans for the amount of the tax credit, due upon of receipt of their money from Uncle Sam. If the borrower doesn’t make good, the loan becomes a junior lien on the property, with an interest rate that is far from usurious - usually just a bit over the prime lending rate.
Missouri was the first state to launch such a program, and has since been joined by Delaware, New Mexico, Pennsylvania, Tennessee and others. States are even lobbying the IRS to deposit the refunds directly to the states, rather than to the home buyers, in order to circumvent non-payment. The IRS, for its part, “is reviewing” this idea.
In Washington, the state Housing Finance Commission runs a tax credit bridge-loan program, which it hopes will grow in the coming months. Not surprisingly, local real-estate professionals are behind the initiative. Washington Association of Realtors president Bill Riley told the San Francisco Chronicle he believes around half of would-be first-time buyers in his state “cannot save enough money for the down payment and closing costs.”
Exactly. That’s the point. This is precisely what differentiates a “would-be” home buyer and a home buyer. And that’s the way it should be.
If the federal government wants to subsidize home ownership, fine. It's already proven unwilling to learn the lessons of Fannie Mae (FNM) and Freddie Mac (FRE) about the costs of jamming borrowers into homes they can't afford. But these rebates should at least be limited to borrowers that meet even the most modest requirements to buy a home in a responsible manner.
The Federal Housing Administration -- another vehicle for government-backed mortgages where taxpayers bear all the risk -- gives out loans that require borrowers to post a meager 3% down payment. If a “would-be” homeowner cannot scrape together this amount of cash, that person should rent and save their pennies. They should not receive a no-interest loan from the state government. This is not discrimination, this is not redlining, its common sense.
In a rush to prop up home prices and delay the ultimate day of reckoning for the vast majority of US real-estate markets, the federal government -- and now state governments as well -- insist on coercing taxpayers to over-leverage themselves and take on a debt burden they cannot truly afford.
From the looks of it, Washington is leading by example.
Just when you thought it was safe to go back in the water... Subprime lending has come roaring back.
But this time, reckless financial innovation isn’t being hatched on Wall Street. Instead, state governments are angling to “monetize” first-time homebuyer tax credits so borrowers can purchase homes with little or no money down.
If this sounds eerily similar to the type of lending practices that got us into this mess, well, it should.
The federal government, as part of the recently passed economic stimulus package, will refund first-time homebuyers up to $8,000 if they meet certain eligibility requirements. The program is frequently cited as one of the myriad reasons a bottom in the housing market is imminent.
Critics, however, argue that rebates don't end up in a buyer’s pockets until his or her 2009 tax returns are filed - even though rebates are credits, not just deductions.
Homebuilders like Pulte Home (PHM), Lennar (LEN) and KB Home (KBH), along with their lobbying arm, the National Association of Homebuilders, have thrown their full weight behind the rebate program, but say it still doesn't go far enough.
In an effort to boost home buying -- even for marginally qualified borrowers -- a number of states are finding creative ways to advance the tax credit to buyers on the day they get their new keys, rather than having to wait for next year's refund check. This allows buyers to pay for things like closing costs, mortgage points - or even the down payment.
States are employing schemes whereby they offer prospective buyers low or no-interest loans for the amount of the tax credit, due upon of receipt of their money from Uncle Sam. If the borrower doesn’t make good, the loan becomes a junior lien on the property, with an interest rate that is far from usurious - usually just a bit over the prime lending rate.
Missouri was the first state to launch such a program, and has since been joined by Delaware, New Mexico, Pennsylvania, Tennessee and others. States are even lobbying the IRS to deposit the refunds directly to the states, rather than to the home buyers, in order to circumvent non-payment. The IRS, for its part, “is reviewing” this idea.
In Washington, the state Housing Finance Commission runs a tax credit bridge-loan program, which it hopes will grow in the coming months. Not surprisingly, local real-estate professionals are behind the initiative. Washington Association of Realtors president Bill Riley told the San Francisco Chronicle he believes around half of would-be first-time buyers in his state “cannot save enough money for the down payment and closing costs.”
Exactly. That’s the point. This is precisely what differentiates a “would-be” home buyer and a home buyer. And that’s the way it should be.
If the federal government wants to subsidize home ownership, fine. It's already proven unwilling to learn the lessons of Fannie Mae (FNM) and Freddie Mac (FRE) about the costs of jamming borrowers into homes they can't afford. But these rebates should at least be limited to borrowers that meet even the most modest requirements to buy a home in a responsible manner.
The Federal Housing Administration -- another vehicle for government-backed mortgages where taxpayers bear all the risk -- gives out loans that require borrowers to post a meager 3% down payment. If a “would-be” homeowner cannot scrape together this amount of cash, that person should rent and save their pennies. They should not receive a no-interest loan from the state government. This is not discrimination, this is not redlining, its common sense.
In a rush to prop up home prices and delay the ultimate day of reckoning for the vast majority of US real-estate markets, the federal government -- and now state governments as well -- insist on coercing taxpayers to over-leverage themselves and take on a debt burden they cannot truly afford.
From the looks of it, Washington is leading by example.
Thursday, February 5, 2009
Keepin' It Real Estate: Capitulation Now!
This post first appeared on Minyanville and Cirios Real Estate.
Finally, housing is starting to act like a market searching for a bottom.
Finally, housing is starting to act like a market searching for a bottom.
Well, sort of.
In former boom states like California, Arizona and Florida, distressed sales are driving the local real-estate markets. After a near-complete evaporation of buying activity last year, buyers have been brought off the sidelines by continued price declines, a glut of homes for sale, and low interest rates. Comparisons with last year are easy: Some areas are seeing activity up more than 300% year-over-year.
Many contend this is a healthy development, as prices return to more affordable levels and latent demand sops up overhanging supply. The bottom, they argue, is nigh.
However, even in areas seeing strong buying activity, median home prices continue to tumble. Banks and private sellers alike are finding the only way to guarantee a sale is to list the house below the market. This constant undercutting is pushing prices down, sometimes well below affordability levels derived from median income data.
This trend is not indicative of the capitulation most market watchers believe must happen before prices can truly bottom.
Capitulation is a concept more often reserved for equity-market analysis than for housing. Since real estate is vastly more fragmented and localized than stocks, housing trends take months, even years to develop, while equities can reverse course in a manner of days, if not hours.
Still, drilling down into individual transactions, evidence of capitulation in certain markets is becoming evident. Sellers, after 4 years of price declines, are finally throwing in the towel.
Homebuilders are becoming desperate: Toll Brothers (TOL) is trying to lure in buyers with 3.99% interest rates through a partnership with Wells Fargo (WFC). Centex (CTX) did them one better by offering rates as low as 3.25% (that rise to 4.50% after 2 years) and Pulte Homes (PHM) also offers a 3.99% fixed rate option for qualified buyers.
Banks like JPMorgan (JPM), Bank of America (BAC) and Citigroup (C), desperate to shed their growing inventory of foreclosed homes, are beginning to accept bids 10, 15 or even 20% below their asking prices.
And its not just banks. Just in the past few weeks, private sellers have started to jump at low-ball offers. Better to take less cash now than be constantly priced out of the market, chasing it all the way down.
Although this type of sale is still very much the exception rather than the rule, it’s an indication that sellers are becoming despondent, willing to accept any reasonable price to rid themselves of what could be months of headaches, upkeep expenses and deteriorating market conditions.
To be clear: This analysis is by no means a call that housing has bottomed, or is even remotely close to a bottom. It’s merely evidence that certain areas are closer to stabilization that others, and these signs -- which may look like capitulation -- should be viewed as a positive development in a market deeply in need of hope.
Tuesday, January 20, 2009
Foreclosures Sting Even Best Builders
This post first appeared on Minyanville and Cirios Real Estate.
Besieged by collapsing home prices and frightened banks scrounging for cash, even the real-estate industry’s brightest stars are finding there’s no place to hide. According to the New York Times, small and mid-size homebuilders who thrived during the housing boom are seeing credit lines pulled even before they miss a payment.
Banks like JPMorgan (JPM) and GMAC, the financing arm of General Motors (GM), loaned builders hundreds of billions of dollars -- even as the housing market began to falter -- to buy up vacant land. Now that demand for new homes has plunged (and buyers in some areas can pick up previously constructed homes for less than it costs to build a new one), builders’ ability to turn a profit has been effectively eliminated.
It's estimated that over 20% of the nation's homebuilders have closed their doors, even as big builders like D.R. Horton (DHI), Lennar (LEN) and Toll Brothers (TOL) limp along, bleeding cash and fighting for survival.
Lenders, for their part, are scrambling to mitigate risk.
Collateral, the term used to describe the assets against which loans are given out, protects lenders in the event of borrower default. As the value of collateral rises, banks become better protected since their loans are now backed up by a more valuable asset. In a downturn, however, falling collateral values means risk increases with each passing day.
In response, banks may ask borrowers to send in cash to make up for the lost value of their investment. These margin calls, as they’re known, can quickly force small firms into insolvency.
Such was the case for Brown Family Communities, a well-known builder in the Phoenix area. The Times reports the firm’s lender, JPMorgan, demanded millions in cash for land on the outskirts of town that had fallen in value. Brown balked, since he was yet to miss a payment and had been a longstanding client of the bank with an impeccable record. Ultimately, Brown lost the property and closed his doors, complaining “The real estate market is gone.”
Other builders have suffered a similar fate, proving that despite extensive government-led efforts to minimize losses from investments gone awry, the fundamental tenets of capitalism remain intact.
Bad investments should yield losses, period. Savvy new buyers, able to handle the risk inherent in buying distressed properties, can make bets that have the potential to reap huge rewards. This cycle of profits and losses fuels economic expansion. By forestalling losses, intervention delays recovery.
The speculative buying of vacant desert land on the edges of the Phoenix city limits in 2005 and 2006 certainly qualifies as a poor use of borrowed money. That builders are being asked for cash to cover banks’ potential losses should be seen as nothing more than prudent lending -- something builders and other real-estate investors spent the boom years conveniently forgetting.
Besieged by collapsing home prices and frightened banks scrounging for cash, even the real-estate industry’s brightest stars are finding there’s no place to hide. According to the New York Times, small and mid-size homebuilders who thrived during the housing boom are seeing credit lines pulled even before they miss a payment.
Banks like JPMorgan (JPM) and GMAC, the financing arm of General Motors (GM), loaned builders hundreds of billions of dollars -- even as the housing market began to falter -- to buy up vacant land. Now that demand for new homes has plunged (and buyers in some areas can pick up previously constructed homes for less than it costs to build a new one), builders’ ability to turn a profit has been effectively eliminated.
It's estimated that over 20% of the nation's homebuilders have closed their doors, even as big builders like D.R. Horton (DHI), Lennar (LEN) and Toll Brothers (TOL) limp along, bleeding cash and fighting for survival.
Lenders, for their part, are scrambling to mitigate risk.
Collateral, the term used to describe the assets against which loans are given out, protects lenders in the event of borrower default. As the value of collateral rises, banks become better protected since their loans are now backed up by a more valuable asset. In a downturn, however, falling collateral values means risk increases with each passing day.
In response, banks may ask borrowers to send in cash to make up for the lost value of their investment. These margin calls, as they’re known, can quickly force small firms into insolvency.
Such was the case for Brown Family Communities, a well-known builder in the Phoenix area. The Times reports the firm’s lender, JPMorgan, demanded millions in cash for land on the outskirts of town that had fallen in value. Brown balked, since he was yet to miss a payment and had been a longstanding client of the bank with an impeccable record. Ultimately, Brown lost the property and closed his doors, complaining “The real estate market is gone.”
Other builders have suffered a similar fate, proving that despite extensive government-led efforts to minimize losses from investments gone awry, the fundamental tenets of capitalism remain intact.
Bad investments should yield losses, period. Savvy new buyers, able to handle the risk inherent in buying distressed properties, can make bets that have the potential to reap huge rewards. This cycle of profits and losses fuels economic expansion. By forestalling losses, intervention delays recovery.
The speculative buying of vacant desert land on the edges of the Phoenix city limits in 2005 and 2006 certainly qualifies as a poor use of borrowed money. That builders are being asked for cash to cover banks’ potential losses should be seen as nothing more than prudent lending -- something builders and other real-estate investors spent the boom years conveniently forgetting.
Thursday, November 20, 2008
Keepin' It Real Estate: Homebuilders Facing Extinction
This post first appeared on Minyanville and Cirios Real Estate.
For as bad as things are in the housing market, it’s remarkable that none of the country’s big homebuilders have gone bust. The industry’s resilience is a testament to how much money the firms raked in during the boom.
Just ask guys in charge.
The Wall Street Journal reports many homebuilder CEOs socked away such obscene amounts of cash over the past 5 years that they out-earned their Wall Street counterparts. As profits soared, Toll Brothers (TOL) CEO Robert Toll and his brother Bruce together took home $773 million, while Dwight Schar, chairman of Virginia-based NVR (NVR) earned more than $625 million from stock sales.
By contrast, vilified Countrywide CEO Angelo Mozilo earned a mere $471 million during the same period.
Sitting on huge -- but dwindling -- stockpiles of cash, big builders like DR Horton (DHI), Lennar (LEN) and Ryland Homes (RYL) have thus far ridden out the bloodletting. According to JPMorgan analyst Michael Rehaut, these 3 may yet see positive cash flow in 2009.
Their smaller rivals, however, may not be so lucky.
Rehaut predicts that Pulte Home (PHM) and KB Home (KBH) could see negative cash flow next year - and some analysts believe 2009 could finally be the year that weaker hands start to fold. Credit protection for Hovnanian (HOV), Standard Pacific (SPF) and Beazer Home (BZH) is trading like the companies’ failure is a foregone conclusion.
Meanwhile, one key characteristic of market bottoms is notably absent: Consolidation.
Just as strong American banks have swallowed up the weak, no meaningful housing market bottom will be found until homebuilders begin to feast on one another.
Let’s face it: We don’t need 10 different multi-billion dollar companies churning out indistinguishable cookie-cutter "mansions" on tiny lots in cramped subdivisions miles from the nearest grocery store. We’ve got our hands full already, thank you very much.
Yesterday, the Commerce Department said October housing starts registered the lowest reading since 1959. Since just 4 of the 10 builders mentioned in this article existed 50 years ago, it looks like 6 are pretty much dispensable.
For as bad as things are in the housing market, it’s remarkable that none of the country’s big homebuilders have gone bust. The industry’s resilience is a testament to how much money the firms raked in during the boom.
Just ask guys in charge.
The Wall Street Journal reports many homebuilder CEOs socked away such obscene amounts of cash over the past 5 years that they out-earned their Wall Street counterparts. As profits soared, Toll Brothers (TOL) CEO Robert Toll and his brother Bruce together took home $773 million, while Dwight Schar, chairman of Virginia-based NVR (NVR) earned more than $625 million from stock sales.
By contrast, vilified Countrywide CEO Angelo Mozilo earned a mere $471 million during the same period.
Sitting on huge -- but dwindling -- stockpiles of cash, big builders like DR Horton (DHI), Lennar (LEN) and Ryland Homes (RYL) have thus far ridden out the bloodletting. According to JPMorgan analyst Michael Rehaut, these 3 may yet see positive cash flow in 2009.
Their smaller rivals, however, may not be so lucky.
Rehaut predicts that Pulte Home (PHM) and KB Home (KBH) could see negative cash flow next year - and some analysts believe 2009 could finally be the year that weaker hands start to fold. Credit protection for Hovnanian (HOV), Standard Pacific (SPF) and Beazer Home (BZH) is trading like the companies’ failure is a foregone conclusion.
Meanwhile, one key characteristic of market bottoms is notably absent: Consolidation.
Just as strong American banks have swallowed up the weak, no meaningful housing market bottom will be found until homebuilders begin to feast on one another.
Let’s face it: We don’t need 10 different multi-billion dollar companies churning out indistinguishable cookie-cutter "mansions" on tiny lots in cramped subdivisions miles from the nearest grocery store. We’ve got our hands full already, thank you very much.
Yesterday, the Commerce Department said October housing starts registered the lowest reading since 1959. Since just 4 of the 10 builders mentioned in this article existed 50 years ago, it looks like 6 are pretty much dispensable.
Thursday, October 16, 2008
Washington Continues to Ignore Root of Housing Problem
This post first appeared on Minyanville and our sister site Cirios Real Estate.
Despite overwhelming evidence that we're in the middle of a debt crisis, regulators insist they're wrestling a liquidity crunch. And all the while, a cancer continues to eat away at the guts of the economy: The housing market. Only when it stabilizes will the financial system and, by extension, the economy -- recover.
And yet, despite this widely recognized fact, the recent $700 bailout package contains little support for struggling homeowners. Even the $250 billion being dumped into banks will have only a minor effect on property values.
Smothered under the weight of falling home prices and tight credit conditions, consumers are reining in spending, as evidenced by yesterday’s bleak retail sales data. The economy is following the housing market into the abyss.
Since last summer, Washington's tactic has been to encourage loan modifications through HOPE NOW and Project Lifeline and to widen the scope of government-backed loan programs via the Federal Housing Administration, Fannie Mae (FNM) and Freddie Mac (FRE).
As noted in the Wall Street Journal and discussed ad nauseum here in the 'Ville, these measures are woefully inadequate to stem the continued decline in housing prices.
As property values fall, over-leveraged borrowers find themselves underwater, or owing more on a house than it's worth. In order to sell, the homeowner must come up with the difference between the sales price and the balance of their mortgage. For most, this is cash that simply doesn’t exist.
As a result, homes sit on the market for months, further pressuring home values. Despite the insistence by some real-estate agents that this is a buyer’s market, it most certainly is not. Until bloated inventories fall, home prices will continue to slide, making buying a home a dangerous proposition in the vast majority of the country.
Meanwhile, politicians continue to bang their heads against the proverbial wall, backing programs simply that do not work with the scope and efficiency that’s needed. Loan modifications, opening up mortgage guidelines and providing tax breaks so homebuilders like Centex (CTX), Pulte Homes (PHM) and KB Homes (KBH) can sell more overpriced houses may help a select few, but they do little to address the root of the problem.
Until taxpayer funds are appropriated to absorb negative equity, price discovery in the housing market will be a long, agonizing process.
Despite overwhelming evidence that we're in the middle of a debt crisis, regulators insist they're wrestling a liquidity crunch. And all the while, a cancer continues to eat away at the guts of the economy: The housing market. Only when it stabilizes will the financial system and, by extension, the economy -- recover.
And yet, despite this widely recognized fact, the recent $700 bailout package contains little support for struggling homeowners. Even the $250 billion being dumped into banks will have only a minor effect on property values.
Smothered under the weight of falling home prices and tight credit conditions, consumers are reining in spending, as evidenced by yesterday’s bleak retail sales data. The economy is following the housing market into the abyss.
Since last summer, Washington's tactic has been to encourage loan modifications through HOPE NOW and Project Lifeline and to widen the scope of government-backed loan programs via the Federal Housing Administration, Fannie Mae (FNM) and Freddie Mac (FRE).
As noted in the Wall Street Journal and discussed ad nauseum here in the 'Ville, these measures are woefully inadequate to stem the continued decline in housing prices.
As property values fall, over-leveraged borrowers find themselves underwater, or owing more on a house than it's worth. In order to sell, the homeowner must come up with the difference between the sales price and the balance of their mortgage. For most, this is cash that simply doesn’t exist.
As a result, homes sit on the market for months, further pressuring home values. Despite the insistence by some real-estate agents that this is a buyer’s market, it most certainly is not. Until bloated inventories fall, home prices will continue to slide, making buying a home a dangerous proposition in the vast majority of the country.
Meanwhile, politicians continue to bang their heads against the proverbial wall, backing programs simply that do not work with the scope and efficiency that’s needed. Loan modifications, opening up mortgage guidelines and providing tax breaks so homebuilders like Centex (CTX), Pulte Homes (PHM) and KB Homes (KBH) can sell more overpriced houses may help a select few, but they do little to address the root of the problem.
Until taxpayer funds are appropriated to absorb negative equity, price discovery in the housing market will be a long, agonizing process.
Monday, October 13, 2008
Keepin' It Real (Estate): Realtors Try Used-Car Salesman Tactics
This post first appeared on Minyanville and our sister site, Cirios Real Estate.
Or not.
If nearly 3 years of home price declines, historically low interest rates and a relentless media barrage of half-truths from the National Association of Realtors haven't been able to stabilize home prices, it's doubtful a gimmicky used-car-style sales event will do the trick.
Coldwell Banker, one of the nation's largest real-estate brokerages, launched a nationwide campaign last Friday to boost the flagging housing market. The 10-day sales event aims to close the gap between buyers and sellers by offering up to a 10% discount on listed homes for, you guessed it, 10 days.
This selling bonanza was hatched in response to a recent survey of over 3000 of the firm's real estate agents, which found that a majority feel listing prices are too high to attract buyers. The survey also showed almost 80% of the agents believe more appropriately priced homes are garnering more attention; apparently, you need a license to know people like to pay less for a house, not more.
Coldwell Banker's president and CEO, Jim Gillespie, is confident the housing market may finally be nearing a bottom. He told our friends at Marketwatch: "Despite the difficult headlines regarding our overall economy, the residential real estate market has been showing several positive signs over recent months that could be signaling a tipping point."
It's unclear whether continuing price declines, historically high levels of inventory, tightening lending requirements or frozen credit markets are the "positive signs" he's referring to.
Gillespie also believes the unprecedented sales event will encourage buyers to jump back into the market: "Because of higher inventory, buyers have more homes to choose from and they can take advantage of near historically low interest rates and affordability levels that are the best they have been in years."
Yes, affordability levels are the best they have been in years: Much better than when the only way to get into a house was to lie about your income and take out an Option ARM with a 1% teaser rate.
About this time last year, homebuilder Hovnanian (HOV) tried a nationwide fire sale to flush out its bloated inventory. More recently, Lennar (LEN), Centex (CTX), and DR Horton (DHI) tried a similar approach with both land and homes - to no avail. The fundamental forces pushing housing prices down will persist, regardless of futile ploys aimed at tricking buyers into paying more than they should for homes.
To be clear: Being negative on the housing market isn't exactly a contrarian position. Therefore, anyone claiming it's a great time to buy -- like Coldwell Banker and tens of thousands of real estate professionals around the country -- clearly have their own reasons for doing so.
Real estate agents get paid to close transactions; whether their client receives (or pays) a fair price is a non-issue.
Commission expenses are borne by sellers, typically to the tune of 6% of the sale price. In California, where the median home price is still over $350,000, that's $20,000 out of the pocket of someone who's already seen his home's value evaporate before his eyes.
The selling agent usually splits the commission with the buyer's agent, a pay structure that gives both sides an incentive to not only focus exclusively on closing deals, but also to sell homes for as much as possible.
Coldwell Banker correctly asserts that many sellers have unrealistic expectations about their homes' final selling price, and as a result keep asking for prices too high for too long. Their cute little sales event, however, is aimed more at earning commissions for their struggling agents than advancing true price discovery in the troubled housing market. If the firm truly had the best interests of homeowners in mind, agents would volunteer to take a pay cut to ease their troubled clients' burden.
Gillespie, Coldwell's CEO, claims the event will "help move the US real estate market in the right direction." He's right - home prices must continue to fall. Simple economics, the interplay between supply and demand, is driving most markets, as tens of homes sit on the market for every one qualified buyer. Until this overhead supply is worked through, prices will remain under pressure.
In some of the most depressed areas -- Las Vegas, the California Central Valley, Florida and Phoenix -- homes have reached or surpassed traditional levels of affordability. Unfortunately, there's more to buying a home than just being able to make the monthly payments. With down payment requirements returning to pre-bubble levels, low interest rates are almost a moot point.
There just isn't any economic rationale for buying if home values keep sliding.
Even if a borrower can afford the monthly payments, home price declines wipe out the tax benefits of writing off mortgage payments and risk putting the new homeowner in the paralyzing position of owing more than his home is worth. Buying a home today is almost like buying a new car: You're upside-down as soon as you're handed the keys.
Until there's real, verifiable evidence that home prices have stabilized, buying a home remains a dangerous financial proposition. This is true in every market, not just the ones that make the headlines for mind-boggling foreclosure rates.
Renting is still the far more fiscally responsible option. Staring into the teeth of a recession, families should be making choices in the best interest of their financial security, not for bragging rights at cocktail parties.
Or not.
If nearly 3 years of home price declines, historically low interest rates and a relentless media barrage of half-truths from the National Association of Realtors haven't been able to stabilize home prices, it's doubtful a gimmicky used-car-style sales event will do the trick.
Coldwell Banker, one of the nation's largest real-estate brokerages, launched a nationwide campaign last Friday to boost the flagging housing market. The 10-day sales event aims to close the gap between buyers and sellers by offering up to a 10% discount on listed homes for, you guessed it, 10 days.
This selling bonanza was hatched in response to a recent survey of over 3000 of the firm's real estate agents, which found that a majority feel listing prices are too high to attract buyers. The survey also showed almost 80% of the agents believe more appropriately priced homes are garnering more attention; apparently, you need a license to know people like to pay less for a house, not more.
Coldwell Banker's president and CEO, Jim Gillespie, is confident the housing market may finally be nearing a bottom. He told our friends at Marketwatch: "Despite the difficult headlines regarding our overall economy, the residential real estate market has been showing several positive signs over recent months that could be signaling a tipping point."
It's unclear whether continuing price declines, historically high levels of inventory, tightening lending requirements or frozen credit markets are the "positive signs" he's referring to.
Gillespie also believes the unprecedented sales event will encourage buyers to jump back into the market: "Because of higher inventory, buyers have more homes to choose from and they can take advantage of near historically low interest rates and affordability levels that are the best they have been in years."
Yes, affordability levels are the best they have been in years: Much better than when the only way to get into a house was to lie about your income and take out an Option ARM with a 1% teaser rate.
About this time last year, homebuilder Hovnanian (HOV) tried a nationwide fire sale to flush out its bloated inventory. More recently, Lennar (LEN), Centex (CTX), and DR Horton (DHI) tried a similar approach with both land and homes - to no avail. The fundamental forces pushing housing prices down will persist, regardless of futile ploys aimed at tricking buyers into paying more than they should for homes.
To be clear: Being negative on the housing market isn't exactly a contrarian position. Therefore, anyone claiming it's a great time to buy -- like Coldwell Banker and tens of thousands of real estate professionals around the country -- clearly have their own reasons for doing so.
Real estate agents get paid to close transactions; whether their client receives (or pays) a fair price is a non-issue.
Commission expenses are borne by sellers, typically to the tune of 6% of the sale price. In California, where the median home price is still over $350,000, that's $20,000 out of the pocket of someone who's already seen his home's value evaporate before his eyes.
The selling agent usually splits the commission with the buyer's agent, a pay structure that gives both sides an incentive to not only focus exclusively on closing deals, but also to sell homes for as much as possible.
Coldwell Banker correctly asserts that many sellers have unrealistic expectations about their homes' final selling price, and as a result keep asking for prices too high for too long. Their cute little sales event, however, is aimed more at earning commissions for their struggling agents than advancing true price discovery in the troubled housing market. If the firm truly had the best interests of homeowners in mind, agents would volunteer to take a pay cut to ease their troubled clients' burden.
Gillespie, Coldwell's CEO, claims the event will "help move the US real estate market in the right direction." He's right - home prices must continue to fall. Simple economics, the interplay between supply and demand, is driving most markets, as tens of homes sit on the market for every one qualified buyer. Until this overhead supply is worked through, prices will remain under pressure.
In some of the most depressed areas -- Las Vegas, the California Central Valley, Florida and Phoenix -- homes have reached or surpassed traditional levels of affordability. Unfortunately, there's more to buying a home than just being able to make the monthly payments. With down payment requirements returning to pre-bubble levels, low interest rates are almost a moot point.
There just isn't any economic rationale for buying if home values keep sliding.
Even if a borrower can afford the monthly payments, home price declines wipe out the tax benefits of writing off mortgage payments and risk putting the new homeowner in the paralyzing position of owing more than his home is worth. Buying a home today is almost like buying a new car: You're upside-down as soon as you're handed the keys.
Until there's real, verifiable evidence that home prices have stabilized, buying a home remains a dangerous financial proposition. This is true in every market, not just the ones that make the headlines for mind-boggling foreclosure rates.
Renting is still the far more fiscally responsible option. Staring into the teeth of a recession, families should be making choices in the best interest of their financial security, not for bragging rights at cocktail parties.
Wednesday, July 30, 2008
To Bulldoze or Not to Bulldoze
The Wall Street Journal reports the idea of bulldozing vacant homes is starting to gain a bit of momentum ... below is a poetic take on the idea.
To bulldoze, or not to bulldoze, that is the question
Whether 'tis nobler for the financial system to suffer
The slings and arrows out outrageous building
Or to take tractors against a sea of unwanted McMansions,
And by destroying end them? To raze: to flatten;
No more, and by a bulldozer to say we end
The foreclosure and the thousand unnatural homes
That Stockton is heir to, 'tis a consummation
Devoutly to be wish'd. To raze, to flatten;
To raze, perchance to demolish: ay, there's the rub.
For in that shoddily constructed spec home what dreams may come
When we have siphoned off this mortal glut,
Must give us pause: there's the respect
That makes calamity of so long a bubble;
For who would bear the whips and scorns of oversupply,
The homies wrong, the proud homeowner's contumely,
The pangs of dilapidated roofing, the hot water's delay,
The insolence of reckless building and the spurns
That patient destruction of the unworthy takes,
When he himself might his demolition make
With a bare tract? who would writedowns bear,
To grunt and sweat under mounting debt,
But that the dread of Centex (CTX) after death,
The undiscover'd courtroom from whose bourn
No builder returns, puzzles the will
And makes us rather bear those abandoned homes we have
Than erect others that we know not how to sell?
Thus conscience does make housing experts of us all;
And thus the unnatural hue of vinyl siding
Is sicklied o'er with the pale cast of rows of twins,
And urban sprawl of great pith and moment
With this regard their profits turn awry,
And lose the name of action. - Soft you now demand for spec!
The fair Beazer (BZH)! Nymph, in thy orisons
Be all thy sins remember'd.
To bulldoze, or not to bulldoze, that is the question
Whether 'tis nobler for the financial system to suffer
The slings and arrows out outrageous building
Or to take tractors against a sea of unwanted McMansions,
And by destroying end them? To raze: to flatten;
No more, and by a bulldozer to say we end
The foreclosure and the thousand unnatural homes
That Stockton is heir to, 'tis a consummation
Devoutly to be wish'd. To raze, to flatten;
To raze, perchance to demolish: ay, there's the rub.
For in that shoddily constructed spec home what dreams may come
When we have siphoned off this mortal glut,
Must give us pause: there's the respect
That makes calamity of so long a bubble;
For who would bear the whips and scorns of oversupply,
The homies wrong, the proud homeowner's contumely,
The pangs of dilapidated roofing, the hot water's delay,
The insolence of reckless building and the spurns
That patient destruction of the unworthy takes,
When he himself might his demolition make
With a bare tract? who would writedowns bear,
To grunt and sweat under mounting debt,
But that the dread of Centex (CTX) after death,
The undiscover'd courtroom from whose bourn
No builder returns, puzzles the will
And makes us rather bear those abandoned homes we have
Than erect others that we know not how to sell?
Thus conscience does make housing experts of us all;
And thus the unnatural hue of vinyl siding
Is sicklied o'er with the pale cast of rows of twins,
And urban sprawl of great pith and moment
With this regard their profits turn awry,
And lose the name of action. - Soft you now demand for spec!
The fair Beazer (BZH)! Nymph, in thy orisons
Be all thy sins remember'd.
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